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The “sugar rush” from innovation subsidies: a robust political economy perspective

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Abstract

The governments of most advanced countries offer some type of financial subsidy to encourage firm innovation and productivity. This paper analyzes the effects of innovation subsidies using a unique Swedish database that contains firm level data for the period 1997–2011, specifically informa tion on firm subsidies over a broad range of programs. Applying causal treatment effect analysis based on matching and a diff-in-diff approach combined with a qualitative case study of Swedish innovation subsidy programs, we test whether such subsidies have positive effects on firm performance. Our results indicate a lack of positive performance effects in the long run for the majority of firms, albeit there are positive short-run effects on human capital investments and also positive short-term productivity effects for the smallest firms. These findings are interpreted from a robust political economy perspective that reveals that the problems of acquiring correct information and designing appropriate incentives are so complex that the absence of significant positive long-run effects on firm performance for the majority of firms is not surprising.

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Notes

  1. As we do not have reliable measures on innovation outcomes, we evaluate the effects of subsidies on firm performance, as the final objective of granting subsidies to firms.

  2. For comprehensive presentations of behavioral economics, see Kahneman (2003), Camerer (2004), Wilkinson and Klaes (2012). For an argument in favor of incorporating bounded rationality into economic analysis, see Conlisk (1996), Berggren (2012).

  3. One can compare information compatibility with the medical system of triage implemented by Napoleon. In performing triage, patients are divided into three groups: those who will survive without care, those who will not survive even if they do receive care, and those who will survive if they do receive care. Only the last group should be treated to maximize efficiency of the limited resources (Iserson and Moskop 2007).

  4. Growth Analysis is a Swedish government agency tasked with analyzing and evaluating Swedish growth policy.

  5. More specifically, firms related to SNI2002-codes 1–5, 55 and 75–99 were excluded.

  6. This effect could also stem from the accounting rules discussed previously.

  7. The share of these very small firms in the total sample is around 11 %, and sample size drops from 8636 to 7689 firms when those firms are excluded.

  8. In the Swedish government’s management of its agencies, performance management is carried out via instructions (or equivalent), appropriation directions and other decisions. The instructions include the agency’s objectives and tasks, as well as periodic reporting requirements. Where necessary, the appropriation direction sets out annual targets, tasks and reporting requirements. Once the Riksdag has adopted the central government budget, the Government issues appropriation directions for all appropriations. The appropriation directions set out the agencies’ financial conditions and priorities for the budget year.

  9. For SEA (Näringsdepartementet 2003–2015a) and Vinnova (Näringsdepartementet 2003–2015b), but between 2009 to 2015 for SAERG (Näringsdepartementet 2009–2015).

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Acknowledgments

We thank Growth Analysis for generous access to its data, and Patrik Tingvall, Daniel Halvarsson, Pia Nilsson, Christian Björnskov, Thi Kim Cuong Pham, Marina Reim, as well as participants at seminars at the Public Choice Society 2016 meeting in Fort Lauderdale, European Public Choice Society 2016 meeting in Freiburg, the Ratio Institute and Jönköping International Business School (JIBS) for valuable comments. All remaining errors are our own.

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Authors and Affiliations

  1. The Ratio Institute, Box 3203, 103 64, Stockholm, Sweden

    Anders Gustafsson, Andreas Stephan, Alice Hallman & Nils Karlsson

  2. Jönköping International Business School, Jönköping, Sweden

    Anders Gustafsson & Andreas Stephan

  3. Stockholm School of Economics, Stockholm, Sweden

    Alice Hallman

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  1. Anders Gustafsson
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  2. Andreas Stephan
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  3. Alice Hallman
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Correspondence to Anders Gustafsson.

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Appendix

Appendix

See Tables 13, 14, 15, and 16.

Table 13 Summary statistics treated versus non-treated by Vinnova
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Table 14 Summary statistics treated versus non-treated by SAERG
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Table 15 Summary statistics treated versus non-treated by SEA
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Table 16 Correlations matrix
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Gustafsson, A., Stephan, A., Hallman, A. et al. The “sugar rush” from innovation subsidies: a robust political economy perspective. Empirica 43, 729–756 (2016). https://doi.org/10.1007/s10663-016-9350-6

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